Good morning. At this time, I would like to welcome everyone to the UPS Investor Relations second quarter 2013 earnings conference call. [Operator instructions.] It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS treasurer and investor relations officer. Sir, the floor is yours.

Andy Dolny

Good morning, and welcome to our second quarter earnings call. Joining me today are Scott Davis, our CEO, and Kurt Kuehn, our CFO, along with Chief Operating Officer David Abney, International President Jim Barber, President of U.S. Operations Myron Gray, and UPS Chief Sales and Marketing Officer Alan Gershenhorn.

Before we begin, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties which are described in detail in our 2012 Form 10-K and first quarter 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission.

In our remarks today, all full year comments and comparisons will refer to adjusted results. In addition, we will discuss UPS’ free cash flow, which is a non-GAAP financial measure. Reconciliations of free cash flow and adjusted results, along with the webcast of today’s call, are available on the UPS investor relations website.

Finally, as a reminder, our goal is to allow as many as possible to participate on today’s call. So, please ask only one question, and then get back in the queue. Again, no multi-part questions, as we will select which part to answer. Thanks for your cooperation.

Now, let me turn it over to Scott.

Scott Davis

Good morning. UPS second quarter results reflect the impact of customer behavior and market trends. International freight forward operating profits and margins continue to be influenced by moderating demand and changes in shipper preference. Customers around the world continue to put greater emphasis on cost, rather than time in transit, trading down in the UPS product portfolio.

We believe this trend is primarily cyclical. Over the last few quarters, there’s been a trough in the innovation cycle. Demand for new high tech products traditionally drives express small package and air freight out of Asia.

On the other hand, some of the trade down is likely permanent. More international trade is being conducted regionally, and supply chains are becoming more efficient, so the need for the fastest express options may not grow quite as strong in the future.

Here in the U.S., volume growth was a little less than we expected. Some opportunities were missed due to labor negotiations. Regarding labor, on June 25 we announced that the Teamster International master contract received majority approval. We believe this agreement provides a fair competitive wage and benefit package that rewards our employees while also enabling UPS to remain competitive for the long run.

UPS and the Teamsters have committed to address unresolved local supplements in UPS freight. The supplements cover specific geographic areas and include topics such as bidding and local area work rules. Until then, the current agreements remain in place, including UPS freight. The company and the Teamsters have agreed to contract extensions while we continue to discuss the remaining issues.

Looking forward at the macro picture, though global economic expansion for the second half of 2013 is still expected, forecasts have been lowered in 10 of the 12 largest economies, including here in the U.S. One area the U.S. continues to struggle with is exports, especially to Europe. So UPS strongly supports the Transatlantic Trade Investment Partnership. This is a great opportunity for the U.S. and the E.U. to set the standard for trade pacts.

Business cycles are creating short term challenges similar to those we have faced many times before. UPS still sees great growth prospects in B2C throughout the world, emerging markets, and healthcare solutions. In healthcare, for example, during the quarter we announced the opening of two new distribution facilities in Hangzhou, China and Louisville, bringing our total healthcare space to more than 6 million square feet worldwide.

At UPS, the key to expanding operating profit is to adapt our integrated network and expand our portfolio to capitalize on changing market conditions. In a moment, David will provide details of several operational cost initiatives and growth opportunities, but first Kurt will take you through the financial results and updated guidance.

Kurt?

Kurt Kuehn

Good morning everyone. As Scott noted, we faced several trends during the quarter that continued to impact revenue and operating profit growth. Total company revenue was $13.5 billion, on volume gains of 2.3%.

A couple of weeks ago, UPS announced our second quarter results of $1.13 per share, slightly below our expectations. The profit of our forwarding business unit dropped significantly, and our international results were reduced as customers continued to choose lower yielding products.

In addition, we lowered guidance for full year earnings per share to a range of $4.65 to $4.85, reflecting a 4% to 13% improvement for the back half of the year, as economists around the world reduced their outlook.

Now let’s review the segment results. U.S. domestic total revenue was up 2.3% on average daily volume growth of 1.9. Operating profit was flat with last year, and margin declined 40 basis points to 13.7%, as productivity improvements did not fully offset higher driver wage and benefit costs.

Daily ground volume increased 2.3%, and deferred was up 1.4. Our next day air volume declined for the first drop in five quarters. Next day package volume gained slightly; however letter volume was down more than 5%.

During negotiations, our ability to win new business was hampered. Even though we received a handshake early, we missed some opportunities and did experience some minor volume diversions.

Our average revenue per package was relatively flat, and though we see consistent base rate improvements, lower fuel surcharges and changes in mix and package characteristics weighed on reported yields.

Now for our international results. Total international revenue was up 1.6%, while operating margin contracted 40 basis points to 14.7. Operating profit was down slightly to $451 million. It was lowered by shifting customer preference for deferred products, especially out of Asia. Network and in-country cost reductions partially offset this revenue shortfall, and fuel and currency were also a drag of about $15 million more than we expected.

Daily export shipments increased 5%, driven by gains from Asia and Europe which were somewhat offset by lower U.S. exports. Local day comparisons aided the growth rate by about 1.5%. Domestic products were up 5.1%, also aided by local day comparisons. The emerging market of Turkey led the way, with double digit growth, while Canada and Italy also had solid improvement.

Currency neutral yields declined 2.8%, as our non-premium products like worldwide expedited and trans-border standard jumped by more than 10%, while our premium express products were flat compared to last year.

Moving on to the supply chain and trade segment, our operating profit declined from the record levels achieved in the second quarter of 2012. Total revenue dropped 3.2% and operating profit was down more than 20%. Operating margin, though, still exceeded 7%.

The decline in revenue and operating profit was primarily due to the forwarding business unit. UPS experienced double digit reductions in forwarding revenue, driven by lower demand for air freight forwarding from Asia.

Revenue is heavily concentrated from large, high-tech shippers whose business is down significantly from last year. In addition, we did see large declines in the military sector. Reduced operating costs could not offset these headwinds. UPS is focused on diversifying our revenue base and David will tell you more about that in a moment.

In our distribution business, revenue was up about 4%. Operating profit declined from last year, as a result of continued investment in healthcare infrastructure. The unit did generate a margin of approximately 8%.

Now let’s review our financial strength. For the six months ended June 30, UPS generated $2.5 billion in free cash flow after capital expenditures of $990 million. So far this year, UPS has paid $1.1 billion in dividends, an increase of almost 9% per share. In addition, we’ve repurchased 21.8 million shares for approximately $1.8 billion.

Note that our Q2 tax rate increased slightly to 35%, due to a higher mix of profits from the U.S. And we do expect that rate to be between 35% and 36% for the rest of the year. Speaking of guidance, earlier in July, we provided new full year expectations for earnings per share of $4.65 to $4.85.

This is based on the anticipation that the market trends experienced during the second quarter will persist through the remainder of 2013. Our new range also reflects the latest forecasts for economic expansion, and as Scott indicated, 10 of the 12 largest economies are now expected to grow a little slower than originally thought.

While we did bring down our numbers, it’s important to note that UPS still expects improvement. In fact, the midpoint of our range calls for about 8% earnings per share growth over the second half of 2012.

Looking at the remainder of 2013 for the segments, in our U.S. domestic segment we expect daily volume will increase between 2% and 3%. Growth should get stronger as the year progresses, as we convert missed opportunities from earlier in the year.

Revenue growth should be slightly higher than volume. Package characteristics and lower fuel surcharges will continue to mask a base rate improvement somewhat, and profitability will be up at a mid single digit base.

For our international segment, in the beginning of the year we expect revenue and daily volume growth of approximately 4% to 5%. Yield improvement will be hampered by continued mix changes as well as commodity fluctuations.

We expect currency to negatively impact profit comparisons by approximately $100 million. However, we anticipate operating profit improvement in line with our revenue growth of 4% to 5%. Third quarter operating profit expansion will be relatively flat, due to comparisons with last year.

Looking at supply chain and trade for the remainder of the year, we expect revenue growth to be flat, with an operating margin of approximately 8%, driving mid single digit profit improvement.

Before I turn things over to David, let me assure you UPS is focused on both our long term strategies and on making the necessary adjustments to adapt to current market conditions. Now David will take you through some of our key initiatives. David?

David Abney

Thanks, Kurt. I want to spend a few minutes discussing how UPS is adapting to the conditions that Scott and Kurt just identified in their opening comments. Economic cycles and consumer behaviors change, creating challenges and opportunities. The key to long term success is adapting our model to capitalize on these changes.

This is something we’ve been doing for more than 100 years. It goes without saying that we have already identified overhead and discretionary cost reduction opportunities. I can assure you that I have an internal checklist of these items. But that’s not all I want to discuss.

Today I’m going to provide insight into how UPS is making strategic changes to our network and portfolio to meet the evolving needs of the market. In our U.S. domestic operations, UPS is wrapping up technology implementations like Orion, which takes route optimization to a new level. To give you an idea of the scale of this project, we have assigned almost 500 people to this multiyear development.

At the same time, we’re delaying some projects that don’t deliver immediate results. Additionally, we have identified opportunities to move more premium volume over the road, taking advantage of more important capabilities and the UPS integrated network.

To meet customer demand, we are leveraging our relationships with retail shippers to develop more sophisticated distribution models that better utilize their store inventory. The implementation of omnichannel fulfillment is still in the early stages, and we’re seeing great results, including B2B shipment growth.

In our international business, margins do benefit from the adjustments we make to our global air network. Maximizing aircraft utilization has always been important. We have already cut our Asia capacity by about 20%, and we will continue to reduce truck routes and schedule frequencies, making adjustments from Asia to the U.S. and Europe, being mindful that we must remain nimble enough to react to surges in demand.

We’re making changes to address the risk and opportunities of a changing marketplace, expanding our presence in emerging markets with an array of solutions for customers. Notably, we expanded our worldwide expedited service to 145 new destinations and 60 new origins earlier this year. We now provide shippers in these emerging markets with an economical alternative to express shipping.

In the supply chain and freight segment, our primary focus is on the forwarding business unit. To better manage our purchase transportation, we’re implementing a system that optimizes buy rates to manage real time market conditions.

Additionally, we are diversifying our revenue base to take advantage of the trade-down trends in the air freight forwarding market. UPS expanded our ocean freight capabilities, a business we’ve been in for over a decade.

For example, we extended the reach of our ocean less than container load service to hundreds of new lanes around the world. UPS Preferred LCO service accelerates ocean shipments and has been expanded to several key markets in Europe. When customers seek less expensive freight options, UPS offers a complete portfolio of solutions.

Also, across the entire supply chain and freight segment, we expect to reduce overhead and operating cost utilizing UPS technology. Given our long history of adapting to changing conditions in the actions I just reviewed, we are confident that we will deliver a solid second half in 2013 and beyond.

Now, back to Kurt.

Kurt Kuehn

Great. Thanks, David, and hopefully you can see that we do have a wide array of both opportunities and initiatives in motion to address current conditions. And operator, I’ll turn it over to you now and we’ll take your questions.